House prices in Lima plunged in Q1 2017
November 06, 2017
Over the past three years, house price rises in Peru have been noticeably weaker than in earlier years, due to the economic slowdown in 2014 and 2015, which was caused by declining copper prices. In 2014, Peru's economic growth slowed to 2.4%, followed by 3.3% growth in 2015. Although the economy fared better in 2016 with 3.9% GDP growth, an economic slowdown has since taken place and growth of only 2.8% is expected this year. The real estate sector has been hard hit by the slowdown.
Foreign buyers will note that since the beginning of 2013 the New Peruvian Sol has fallen from US$1=PEN 2.55 to US$1=PEN 3.25, largely due to copper price weakness. This reduces housing costs for foreign buyers. Foreign residents and nonresidents alike may buy Peruvian property. Investment in Peruvian property does not require government approval, except if such property is close to Peru's frontiers.
Prior to these recent years of economic slowdown, the country had enjoyed strong growth: 8.5% in 2010; 6.5% in 2011; 6% in 2012; and 5.9% in 2013, according to the IMF. Lima's housing market enjoyed a boom during those high-growth years, which is now tailing off:
- In 2010, residential property prices rose by 15.18% y-o-y (12.83% in real terms);
- In 2011, residential property prices rose by 17.89% y-o-y (12.56% in real terms);
- In 2012, residential property prices rose by 18.13% y-o-y (15.09% in real terms);
- In 2013, residential property prices rose by 15.49% y-o-y (12.28% in real terms);
- In 2014, residential property prices rose by 12.03% y-o-y (8.53% in real terms).
- In 2015, residential property prices rose by 9.08% y-o-y (4.48% in real terms);
- In 2016, residential property prices rose by 6.52% y-o-y (3.18% in real terms).
Despite the decline in Q1, house prices in Lima are expected to rise by around 5% in 2017, followed by 7% growth in 2018, according to the Peruvian Chamber of Construction's (Capeco) President Ricardo Arbulú, as a result of reactivation of demand in middle segment districts such as Jesús María, Pueblo Libre, Lince and Magdalena.
This is because from June, the Ministry of Housing, Construction and Sanitation (MVCS) increased the maximum value of property which can be covered by the Good Payer Bonus scheme (Bono del Buen Pagador or BBP) from PEN 153,900 to PEN 300,000, and increased the scale of payments, characterizing an April reduction in the maximum as 'a mistake'. The BBP is a non-reimbursable financial assistance to borrowers from intermediary financial institutions.
Foreign residents and nonresidents alike may buy Peruvian property. Investment in Peruvian real estate property does not require government approval, except if such property is close to Peru's frontiers. Foreigners are restricted to own property near government installations and military bases.
Peru: yields have fallen from excellent to moderate
Property prices in Peru have risen significantly over the past few years.
Apartments in desirable areas like Miraflores, Barranco and San Isidro may cost $2,500-$2,600 per square metre (more for larger apartments) while costs fall to $1,500 per square metre (sq. m.) in areas like Chorrillos.
How much can you earn? Rental yields in Lima are much less good than they used to be. Yields on smaller apartments have fallen over several years from an amazing 13% to around 5% for 100 sq. m. apartments. By regional standards house price to rent ratios in Peru are comparatively high, so you earn more in many other Latin American countries. 4.50%-5.50% is maybe not a bad yield, but it is not great either. Smaller apartments are likely to yield more.
The currency risk. Peru’s Sol depreciated during the period 2013-2015, but has been stable since. Over the past decade it has done much better the Chilean Peso, Brazilean Real, let alone (heaven forbid!) the Argentinian Peso.
Round trip transaction costs are moderate in Peru. See our property transaction costs analysis for Peru and property transaction costs in Peru, compared to the rest of Latin America.
Rental income tax is high in Peru
Rental Income: Rental income is taxed at flat rate of 30%, without any deductions.
Additionally, leasing real estate in Peru is subject to VAT at 18%. VAT is imposed when legal entities (individuals and corporations), resident or not, rent out Peruvian properties.
Capital Gains: Gains earned by nonresidents selling Peruvian property are taxed at a flat rate of 30%.
Inheritance: There are no inheritance or gift taxes in Peru.
Residents: Residents are taxed on their worldwide income at progressive rates, from 15% to 30%.
Total transaction costs are low in Peru
Total round trip transaction costs, i.e. the total cost of buying and selling a property, are between 6.10% and 9.06%. The biggest cost is the estate agent’s fee, which is between 3% and 5%. Five procedures must be completed to register property, which can be accomplished in about 6 to 16 days.
Peru's rental laws are pro-tenant
Rent: Although rents may be freely agreed by the landlord and the tenant, strong security of tenure is given to the tenant.
Tenant Eviction: Legal proceedings to evict the tenant can be burdensome and highly time-consuming (even tedious).
Weakened economic growth in H1 2017Peru's economy continued to pick up, expanding by 3.9% in 2016. The somewhat stronger expansion of Peru's economy in 2016 was mainly driven by stronger exports (9.5% y-o-y), and private consumption (3.4% y-o-y).
However the central bank predicts economic growth of only 2.8% in 2017, down from an earlier forecast of 3.5%. The lower growth is attributable to:
- The damage to infrastructure and to the agriculture sector by floods brought by the "Coastal El Niño" phenomenon during the first quarter of 2017; and
- Investment fell as infrastructure projects were halted partly due to the Odebrecht / "Lava Jato" corruption scandal.
"On the external side, while commodity prices have recovered somewhat since late 2016, they remain significantly lower than during the commodity boom," says Francisco Roch of IMF's Western Hemisphere Department. "There is also uncertainty about the U.S outlook and how much protectionist pressures will rise globally."
A new Multiannual Macroeconomic Framework (MMM) 2018-2021 was approved by Peru's Council of Ministers in August 2017. The MMM, which contains the country's economic agenda for the next four years, is prioritizing public investment, particularly focusing on security, education and health sectors. "The Macroeconomic Framework establishes a 4% initial increase for 2018 and budget decisions considering the boost to economic growth and its dynamism," according to former Prime Minister Fernando Zavala.
In September 2017, annual inflation fell to 2.9% from 3.2% in the previous month, and from 3.13% in September 2016. Unemployment is at 5.5% in August 2017, a decline from 6.7% last year, according to the Central Reserve Bank of Peru (BCRP).